Tuesday, January 28, 2014

Here. A very interesting post that links to another great post by LK on the subject. They tie Mises to the "soup kitchens caused the Depression" view, or more formally - that a variety of policy changes had major negative supply impacts.

While I'm on the subject of the longevity of Austrian Business Cycle Theory, I did not link to this post by Jonathan criticizing my claim in my recent Critical Review article that Hayek's BCT (although I'd throw in ABCT generally) was inconsequential for macro (after the 30s of course). Jonathan's argument doesn't really move me at all (in fact I cited some of the things that he mentions in the article), but it's worth looking at. I think he changes the question to "has any important macroeconomist ever cited Hayek or liked to read him", the answer to which is of course "yes", but not the question I'm interested in. The case that Hayek was essential to RBC is very weak. The connections are vague in the first place, they have nothing to do with the central features of Hayek's BCT, and none of the handful of what we consider foundational papers in that literature cite him or anyone having anything to do with his business cycle theory. It's true that Lucas cites him in another paper - not for his business cycle theory but for saying that a Walrasian general equilibrium view is important. Anyway, I could go on but there is really no case for this at all. But read Jonathan and see what you think.

Actually the best case for Hayek's influence on macro is that he helped move Keynes from the Treatise to the General Theory, but of course that has nothing to do with Hayek's own BCT.

13 comments:

Arguing about how much "influence" something had is a little silly because both your theory and Jonathan's theory are entirely unfalsifiable and largely based on what you both feel. You can both make credible claims, but "influence" can't be measured, and ultimately it comes down to choosing whatever list of criteria makes your case for you. There is no right answer. You see "influence" wherever you choose to see it; and you don't see it if you don't choose to.

"We may disagree with what constitutes influence but that hardly means we just choose to see it places."

^^^ That's my whole point. I'm not disagreeing with you, I'm just saying that "influence" is a sufficiently malleable word that two people can take two opposing positions on the same issue and both be right at the same time. If you go for that whole Bayesian Inference, LessWrong.com stuff, that is usually a good indication that the theory needs to be better-refined.

But I'm not a historian for this exact reason.

Do I think Hayek had an influence on modern macro? Not as much as Mises. I think it's easier to see the link between Mises and Friedman than it is to see one between Hayek and Lucas. I think Hayek had a big influence on Public Choice theory and stuff. That had an influence on macro, too, but it is definitely more of an indirect link between Hayek and macro.

But again, I see these links because I choose to see them. I am equally as sympathetic to the case against influence, because it's kind of like looking at a shade of maroon and asking someone if what they see is red influencing purple or purple influencing red? It sort of depends.

Just to clarify one point - the specific claim I make that Jonathan is responding to is that the BCT was inconsequential for modern macro. Other contributions of Hayek have been much more consequential.

In abbreviated form it's easy to lose that distinction, but that was the initial claim (and I listed a few alternatives that I was NOT claiming in the article - including that Hayek broadly speaking was inconsequential).

If you are saying that these sorts of historical/HET questions are vaguer than I don't think anyone disagrees with that. But if the claim is - as it was initially - that we are basing things on feelings or that we are choosing where we see influence - then I definitely don't agree with you on that.

As Jonathan pointed out recently, there's good evidence that high welfare rates exacerbated the depression in the UK. (This has been quite well known in Britain for a long time, it's interesting that it's only just been picked up on elsewhere). http://www.economicthought.net/blog/?p=5590

I also didn't like Daniel's paper on Hayek's ABCT. There are a number of confusions of what Hayek wrote, confusions with Mises and odd leaps in reasoning.

Certainly - labor supply doesn't just disappear during a depression, but I think what strains credibility for people is that it's the dominant factor. Supply shocks were important in the U.S. in addition to the monetary tightening - although I don't know about the British case, if it followed the same basic patterns its not surprising that a hike in social assistance of that magnitude had some effect (particularly given how novel the system was for most people).

Hmmm... Mises didn't really come up except when I noted I would not be talking about Mises. I tried to get a broad cross-section of people to look it over to confirm my read of Hayek was sound, so I'm curious what you found confused. Hopefully it's just a difference of opinion rather than outright malpractice (especially considering I don't remember any major differences of opinion (just cleaning up a few points) on Hayek's BCT when I asked you to read that other chapter - and I don't think my presentation of the ideas changed at all between that and this article).

"Supply shocks were important in the U.S. in addition to the monetary tightening - although I don't know about the British case, if it followed the same basic patterns its not surprising that a hike in social assistance of that magnitude had some effect (particularly given how novel the system was for most people)."

Yes. I agree that both were important. The monetary shock much moreso in the US and the welfare element moreso in the UK (in the UK few banks went bankrupt). Mises should have recognized the monetary shock, it's reasonable to criticize him for that. But he was not wrong to suggest that wage stickiness and welfare were important too. Mises was not addressing the US specifically in the 1931 article that Krugman mentions (it's in "The Causes of Economic Crises.")

"Mises didn't really come up except when I noted I would not be talking about Mises."

For one thing you say that Hayek used a time-preference theory of interest. It's Mises who did that, not Hayek. Hayek's believed in productivity interest like Fisher until he wrote Appendix 5 of "Pure Theory of Capital". In that appendix he opens up a role for time-preference and tries to combine it with productivity. He may have believed in PTP interest early in his career, I'm not sure. I'm not accusing you of malpractice, we just have different opinions. I'd like to write a more full reply about what I disagree with, but I haven't got the time at present.

A productivity theory is fine for the demand side, but something has to determine the supply side. I am just presenting the view in the secondary literature on this point, though - so I'll defer to you.